Fiscal outrages in America

Veto one for the Gipper

President Bush should stop Congress's ghastly new corporate tax bill

GEORGE BUSH has spent much of the past two weeks dropping heavy hints that he is the true ideological heir of Ronald Reagan—the champion of a muscular foreign policy, small government and free markets. Yet on the domestic front he has done more to mock Mr Reagan's memory than to honour it. The ersatz Reaganaut has doled out record subsidies to farmers, boosted spending on the country's bankrupt Medicare system and generally shown little aversion to expanded government. Now Mr Bush has a chance to do something to prove that his claim to Reagan's legacy is more than just empty rhetoric.

One of Mr Reagan's most important domestic achievements was the 1986 Tax Reform Act, which flattened rates, simplified the rules and removed countless loopholes for firms and individuals. Now Congress is close to passing a corporate tax law that does pretty much the opposite: it will confuse and distort the tax code, increase the number of loopholes and dole out pork in obscene quantities. The Senate passed its version of the bill in May; the House looked set to pass a slightly different version as The Economist went to press. Mr Bush should make it clear that neither of these monstrosities should become law.

As so often, this legislative monstrosity began with a sensible goal: to repeal a $5 billion annual tax break for American exporters that the World Trade Organisation in 2002 ruled was an illegal subsidy. The WTO gave the European Union the right to impose up to $4 billion of retaliatory tariffs on American goods until the tax break was removed. After much sabre-rattling, the Europeans finally slapped 5% tariffs on a slew of American goods in March, and promised to raise them by one percentage point every month for a year. These tariffs forced Congress into action.

In theory, Congress had a perfect opportunity to emulate the 1986 tax package. The money saved by removing the illegal subsidy could have sweetened a broader corporate-tax reform, lowering rates and eliminating loopholes. Although some firms that get the tax subsidy might have lost out, America's economy would have been better off. In practice, rather than embracing the cause of tax reform, Congress decided to look for other ways to compensate the exporting firms. With an election looming, this soon became a free-for-all, with politicians rushing to buy off voters and lobbyists coming up with ever longer lists of endangered companies.

The bill's backbone in both the Senate and House versions is a throwback to 1970s industrial policy—a cut in the corporate tax rate for manufacturing. Yes, the idea is to distort the tax code to favour specific industries (and thus also to distort American firms' investment decisions). And, thanks to all those lobbyists, “manufacturing” (in the House bill) is defined to include farmers, film-makers and oil refiners among others. Small wonder America's tax-collection agency has called the bill impossible to implement.

Go on: save the fishing-tackle-box industry

Then there are the special favours. The 1,000-page Senate bill doles out tax breaks to such deserving causes as Oldsmobile dealers, foreign punters at American race-courses and NASCAR track owners. The House version includes tax relief for bank directors, alcohol distillers, producers of fishing-tackle boxes and sonar fish-finders. It also offers a $9.6 billion “buy-out” to tobacco farmers and allows residents of states with no income tax to deduct their state sales-tax payments from their federal taxes, at least for two years. (Ironically, Mr Reagan got rid of this deduction in the 1986 Tax Reform Act.)

Both bills make an attempt to reduce the cost of these giveaways by declaring many of them to be temporary. This is the same fiscal trick that Mr Bush used with some of his tax cuts. In Washington “temporary” tax breaks have a habit of becoming permanent. If that is the case, one budget-watchdog organisation reckons that the House version of the corporate tax bill could cost more than $220 billion over the next decade.

Reason may yet prevail during the “conference” session, when the politicians try to reconcile the House and Senate versions. That could be the moment to strip out the pork and the primitive industrial policy. But this will happen only if Mr Bush, who incidentally has yet to veto anything (unlike Mr Reagan), makes it clear that he will chuck the current versions into the Potomac.